It was debt, not just change…

We wrote a recent article on change (not debt), and suggested the demise of organisations such as Toys R Us & Maplin are failing due to them not adapting to changing market conditions.

Well it seems, this is only half of the issue…

Before we get deep into this, it’s best to position where we are in all of this, as you’re probably thinking ‘who are these people and why do they think they have knowledge on national or global change & debt issues’. And we get this and can fully understand why you would ask these kind of questions.

We are the ‘Money Saving Experts‘ for the office and workplace. And yes (currently) you are right, we provide office solutions (that save money) to business & schools across just Lancashire & Greater Manchester. Not nationally (except for Infinity) and certainly not yet internationally.

But let’s be candid about this. Our vision is to be a global leader in money-saving office solutions.

To back this up, we already have previous experience within the team on national and international trading with business and government in our chosen field. And are constantly reading, watching and learning about events, solutions, case studies that are not just effecting, but being implemented by all types of organisations around the world. Some of which, we share with you in our blogs and through our LinkedIn group, Profit Efficiency & Savings.

So, let’s get back to the exciting bit, what have we found out…

It seems the retail downturn, which is effecting major national & global brands (at its core) is all about debt.

Let’s take Toys R Us as the example, but we have to look at it from its core headquarters in the US…

Toys R Us was founded in 1948 in Washington, D.C. (as a baby furniture business). And by the mid 1980’s, it had hundreds of toy stores around the world and more than a billion dollars in sales.

Now this is important, because Toy R Us in the UK is a franchise, and although the UK arm is an independent business, it was likely to be governed by the over-riding business model controlled by the headquarters in the US, and also likely to pay the US royalties on their UK sales.

Now anyone, who has any experience of operating in a franchise model, will understand that you are usually contracted to follow the over-riding business model, and it is very difficult to do anything creative and different. And we have certainly had many years past experience of this, so can understand Toy R Us UK constraints.

But soon, the US company started losing ground to discount chains. And in the late 1990’s, Walmart took over as the country’s No. 1 toy seller. In 2004, after years of flat sales and falling profits, the Toys R Us board of directors put the company up for sale.

It turns out, the buyers were a group of private equity firms. These are investment firms that bundle together money from investors to buy companies, try to fix them by cutting costs and increasing sales, and then sell them or take them public to make a huge profit.

But to really get what happened with Toys R Us, you need to understand how these private equity purchases operate.

They rely on something called ‘a leveraged buyout‘…

If a private equity firm wants to buy a company, it’ll put up a small portion of the money (usually around 20%). Then it’ll go to the bank and borrow the rest (debt). So, they put huge debt on the company they buy. And in other words, the private equity firms take out these loans, buy a company and then make that company pay the loans back.

In 2005, the Toys R Us board of directors sold the company for $6.6 billion to the private equity firms Bain Capital, KKR and Vornado. These firms put up about 20 percent of the total and borrowed the rest from the banks.

Toys R Us became a private company again, with more than $5 billion in debt. And then things went wrong.

Amazon.com exploded. During the next five years, sales at Amazon quadrupled to $34 billion. Amazon went into the toy sector in a big way, adding one more massive competitor for Toys R Us to compete against.

To compete, Toys R Us needed to invest significantly in its website and stores on a global basis. But the retailer was using most of its available cash just to pay back its debt and had no spare investment money. So this leveraged buyout deal left Toys R Us with massive debts and almost no cash.

Which brings us to last year. Sales at Toys R Us had fallen for five years. Toys R Us hired lawyers to try to delay the company’s next loan payment. Word got out that the company might go bankrupt, and toy makers panicked. Other toy makers demanded that Toys R Us pay them up front in cash. But the retailer didn’t have any cash.

And this situation, seems to have had a massive knock on effect for Toy R Us UK and no doubt, Toy R Us right across the world. As being in a franchise system, you are normally governed by the business model and systems that the Master franchisers lays out. And in this case, the business model & systems provided by the US headquarters of Toys R Us.

It seems Toys R Us in the US have been stuck in a never-ending spiral downwards since 2005. Yes the market place has changed and new (different) competitors have entered. But, due to a severe lack of available investment cash they could not change with it, which seems down to the debts brought on by the private equity firms initial purchase.

So everything is not quite what it first seemed…

Yes, not changing with the market was a contributing factor. But, if you don’t have or can’t raise the spare investment cash to allow you to change (due to massive debts, brought on by a private equity purchase in this case), you’re going to face a very uncertain future.

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